This is our contractor Corporation Tax guide, which covers the basics of Corporation Tax (CT). This is the main type of limited company tax and one of your main contractor taxes.
Under the UK tax system, individuals pay Income Tax, whilst companies pay Corporation Tax.
UK limited companies pay CT on their profit to HM Revenue & Customs (HMRC) every 12 months.
As a limited company contractor or small company owner, HMRC will issue a notice to deliver a company tax return each year.
Therefore, when you are a director who is running your own company, every year, you will need to ensure that your business will:
- File a Company Tax return and full annual accounts for the company financial year with HMRC. The company’s UK Corporation Tax return is called form CT600.
- Pay your Corporation Tax bill to HMRC by the Corporation Tax deadline.
- File your accounts with Companies House. The reports you file with Companies House are a reduced version from the complete set of annual accounts. This is because Companies House requires less information; as a result, not all of the data from the company’s full accounts are shown on public records.
In today’s world, most companies opt to pay Corporation Tax online. You can still pay at the Post Office or Bank counter; however, paying online via the HMRC website or through your company’s internet banking is much quicker.
As a limited company contractor, your business will subtract all allowable business expenses from business income to arrive at a profit in the company accounts. Certain expenses (such as entertainment, penalties, fines etc.) will need to be added back on to the profit in the company tax workings to arrive at a revised profit, as these expenses are not tax-deductible. The appropriate tax rate is applied to the adjusted profit to calculate your company’s tax bill.
All companies must deliver a company tax return to HMRC and pay Corporation Tax on their profits, regardless of their size or, indeed, their level of profits.
Contractor Corporation Tax -receiving your CT reference number
Nowadays, when you register a new company with Companies House, they will inform HM Revenue & Customs (HMRC) of your company’s existence. Then, shortly after incorporation, HMRC will send your CT reference number through the post to your company’s registered office.
As part of this Company Tax return guide, please note the Corporation Tax reference has an initial three digits related to the CT office. The office is located in the UK area that looks after your company, albeit this seems centralised nowadays. Two sets of five digits make up the company’s actual UTR (Unique Tax Reference). The UTR will show on:
- The CT600 form which needs to be filed with HMRC each year.
- All correspondence from HMRC. This will include any reminders and the annual letter to `deliver company tax return.’ This is an annual notice that informs you that you will need to complete a company tax return.
- Your company’s CT service within your online account with them. Setting up a Business Tax account with HMRC is recommended as part of your company setup. As part of this, you can add the Corporation Tax service. This will then allow you to track liabilities and payments in the future.
For ease of reference, we have written about limited company taxes and the filing dates of official documents and tax payments. We also have detailed what you should consider if you are looking to change your contractor accountant.
Pay Corporation Tax –current rates & fiscal years
The annual calendar year ends on 31 December, whereas the company tax year in the UK ends on 31 March.
The current rate of Corporation Tax is 19%, and in the company tax years ended 31 March 2022 and 2023, all companies will pay Corporation Tax at this rate on their taxable profits. In previous years, large companies paid a higher rate of CT than smaller companies. 1 April 2015 was the date that HMRC lined up the rates for small and large companies.
Please note that following the March 2021 Budget, the Chancellor confirmed an increase in the CT rate. This change comes after all companies have had the same CT rate for several years. Therefore, from 1 April 2023, the 19% rate will increase to 25% on profits above £50,000, with marginal relief for profits of up to £250,000.
This means that a company with profits:
- Up to £50,000 -will pay Corporation Tax at 19%.
- Between £50,000 and £250,000 -will pay 19% on the first £50,000 and 25% on the remainder.
- Profits above £250,000 -will pay 25% on all of the profits.
The company tax year or `fiscal year’ runs from 1 April to 31 March. The personal tax year runs from 6 April to 5 April.
Finally, the `fiscal year’ may differ from your company’s accounting year. If it is and the CT rates have changed following a budget, you will apportion your profits accordingly. This means the profits will be apportioned on the HMRC Corporation Tax return between the company tax years. As a result, the profits will be taxable in the company tax return, partially at different rates.
Contractor Corporation Tax -your company year-end
This Corporation Tax guide now looks at the company year-end for your small business. On the day your company is set up, the year-end will automatically default to the end of the month in the following calendar year. Therefore, if your business were incorporated on 26 June 2022, the year-end would default to 30 June 2023.
In the above example, you may prefer a different company year-end for your business. If this is the case, you or your accountant can submit a form to Companies House requesting this change.
It is also possible to change your business year-end in the future too. You can, however, only `extend’ your accounting period once every five years.
In contrast, shortening your business year-end has no restrictions.
Contractor Corporation Tax -calculating company profits subject to CT
This Corporation Tax guide now looks at calculating your company’s profits and the CT bill.
Every accounting year, you must work out your company’s profits subject to Corporation Tax. Next, you will report these on the company’s UK Corporation Tax return (CT return) which is called form CT600. Further information and CT600 guidance are shown on the HMRC website. There is also a CT600 company tax return guide available online from HMRC.
Please note as part of this Corporation Tax return guide, when completing the CT return (form CT600), your accountant will add up all the business income. They will then deduct the sum of any business expenses, including salaries. In the company tax workings, they will add back to the profit any disallowable expenses (depreciation, entertaining costs, penalties or fines). They will also deduct from the profit any income that is not taxable. Finally, they will deduct capital allowances and any other tax reliefs.
As part of this HMRC CT600 guide, please note if the business year spans the `fiscal year’ (see above), and the rate has changed, you will apportion your profits over the appropriate number of days. You can then work out the tax at the applicable rates accordingly and arrange to pay Corporation Tax online.
Expanding on the above, let us assume your company year-end ends on 30 June. The accounts covering the year to 30 June 2023 will have:
- 274 days (1 July 2022 to 31 March 2023) profits taxed at 19%.
- It will also have 91 days (1 April 2023 to 30 June 2023) profits taxed at either:
- All at 19% or
- Part at 19% and part at 25% or
- All at 25% (see above).
To reiterate, if the profits are no more than £50,000, the tax rate will be 19%.
Contractor Corporation Tax -the CT Return filing deadline
The CT600 form filing deadline is 12 months after your business year-end. Therefore, if your company’s year-end ended on 30 June 2023, the Corporation Tax deadline with HMRC would be 30 June 2024.
Corporation Tax payments are due nine months and one day after the end of an accounting period. Therefore, if your company year-end was 30 June 2023, the due date for the Corporation Tax payment to HMRC would be 1 April 2024.
A company can pay CT in several ways, although paying via cheque through the post is no longer available. Most contractors now pay their CT by internet banking; however, if you pay by card, please note:
- There is a fee if you pay by corporate credit card or debit card.
- There is no fee when you pay by personal debit card.
- You cannot pay with a personal credit card.
Company accounting tax periods can only cover a maximum of twelve months in length. When your company is set up, it could have a period longer than twelve months. If you extend your company year-end at some future point, the period could be longer than twelve months. In this case, the company will have two Corporation Tax accounting periods and will need to file two CT600 forms. The first return would be for the first twelve months of your accounting period, and the second would be for the remaining days up to the business year-end.
In the above example, if your company commenced trading on the actual day that it was incorporated, which was 26 June 2022, it would complete two company tax returns covering:
- The twelve months to 25 June 2023.
- The period from 26 June 2023 to 30 June 2023.
Corporation Tax Penalties
In this Corporation Tax guide, we now look at CT penalties. When you file your company’s CT return, the due date is twelve months after your company year-end.
If the company misses the Corporation Tax deadline, the following fines apply:
- One day late: £100 penalty.
- Three months late: A further £100 penalty (£200 in total).
- Six months late: 10% of the unpaid amount.
- Twelve months late: A further 10% of any unpaid tax (20% in total).
Contractor Corporation Tax -CT losses
When a company makes a trading loss, it can either:
- Carry back the loss against profit for the previous twelve months; or
- Carry the loss forward against future profits.
A loss can be carried forwards indefinitely to be set against future profits.
When a company closes down, it can claim `terminal loss relief.’ This means It can carry back any losses against profits in the three preceding years before the final accounting period.
This Corporation Tax guide looks at most of the areas that may affect your contracting business or small limited company in terms of CT. As mentioned earlier, CT is one of your main contractor taxes. Your contractor accountant will typically handle the preparation of and file a form CT600 for your company whilst you can arrange to pay your company’s tax liability.
The process in terms of completing a Corporation Tax return is not always straightforward. It can even be more complex if tax rates or capital allowances have changed. In addition, the process of filing to satisfy HMRC requirements is not straightforward. They now require specific `tagging’ for the figures in the accounts, and accountants use specialist software to do this. If you have an excellent accountant to look after you, they will take care of this.
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